Following a two-day meeting, the Federal Reserve made a widely expected decision to pause its rate-hike cycle. However, the surprising aspect was the Fed’s unexpectedly hawkish stance, signalling further rate hikes in response to persistent inflation that remains above the target range. This marks the first pause in interest rate increases since the Fed’s efforts to combat soaring inflation began in March 2022. Consequently, the Fed’s key borrowing rate remains unchanged within its prior target range of 5% to 5.25%.

A notable development emerged from the meeting’s ‘dot plot’ which revealed a pronounced upward shift, pushing the median expectation for the funds rate to 5.6% by the end of 2023, up from a previous forecast of 5.1% recorded in March. These projections imply the likelihood of an additional 50-basis point hike before the end of the year. Assuming the committee choses a 25-basis point increment per move, this suggests two more hikes are anticipated in the remaining four meetings, potentially occurring in July and September. The next scheduled meeting of the Federal Reserve is slated for the 25 ^th – 26 ^th of July.

Chairman Jerome Powell stated that the cautious pause was intended to allow the Fed to gather more information before determining the necessity of future rate increases. The focus now lies less on the pace of these moves and more on identifying an appropriate endpoint that curbs inflationary pressures while minimizing any rise in unemployment levels.

According to the post-meeting statement, maintaining the current target range enables the Committee to evaluate additional information and its implications for monetary policy. Chairman Powell further indicated that future rate decisions would be made on a meeting-by-meeting basis, emphasizing the officials’ reliance on forthcoming economic data to guide their choices.

Fed members revised their forecasts for the upcoming years, now anticipating a fed funds rate of 4.6% in 2024 and 3.4% in 2025. These projections represent an increase from the previous forecasts of 4.3% and 3.1% in March, as stated in the Summary of Economic Projections. Notably, these forward-looking estimates imply the possibility of rate cuts, potentially amounting to a full percentage point reduction in 2024, should the current outlook prevail. The long-term expectation for the fed funds rate remains steady at 2.5%.

For nearly a year, many economists have been calling for an imminent recession and a potential crack in the economy. However, the Federal Reserve’s latest quarterly projections indicate an upward revision in economic growth estimates for 2023. Officials now anticipate a 1% gain in GDP, surpassing the previous estimate of 0.4% recorded in March. Also, there is increased optimism regarding unemployment figures for this year, with a year-end rate of 4.1% projected, compared to 4.5% forecasted in March.

The Federal Reserve’s hawkish hold on Wednesday suggests a likelihood of another rate hike in July. However, the mixed retail sales and manufacturing data released on Thursday fail to provide a clear direction. The highlight from Thursday’s data is perhaps the rising jobless claims, which are unlikely to prompt a significant slowdown in payroll growth that would deter the Fed yet.

Source: Tradingview

The possibility of further rate increases put pressure on stocks immediately after the news broke on Wednesday, but encouraging talk on the fight against inflation allowed the market to rebound briefly. The rally extended on Thursday despite the overbought momentum conditions, with first minor resistance arising at 15,265. A mild pull back to unwind the overbought momentum conditions could be seen in the very short-term; however, further strength to 15,600 is likely in the coming month(s).

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